If there’s one coverage group that’s even more desirable than metals and mining, it just might be oil & gas investment banking.

Not only do you see some of the biggest deals with the world’s largest companies, but you also learn new accounting techniques, valuation methodologies, and maybe even something about petroleum engineering.

Everything within the natural resources group – metals/mining, oil & gas, and power and utilities – is like a cross between industrials and commodities, and you see that most of all with oil & gas – where some sectors (upstream) are commodity plays and others (oilfield services) are much closer to “normal” companies.

We have a sector specialist onboard today who’s going to break it down and explain everything to you.

Here’s a quick geological survey of the land ahead, before we dig in and start drilling wells:

Who gets into oil & gas investment banking and how to maximize your chances of breaking in

Sector drivers and what to look for when analyzing an oil & gas company

Valuation, from NAV to EBITDAX and everything in between

The top boutiques and other banks in oil and gas coverage

Where you go after the sun sets and you decide to look for “more lucrative oil fields”

From Petroleum Engineering to Financial Engineering

Q: A lot of analysts and associates get placed into their respective groups by happenstance, luck, or just good ol’ networking. How is your story different?

A: I actually studied petroleum engineering in college, which focuses on calculating the availability of resources.

Nowadays, students tackle broader “energy allocation studies,” including utilities / power generation and alternative energy. A lot of people here in New York work in finance, but as you’ve said before, if we were all in Texas, we would all talk about how we’re in oil and gas. :-)

Q: And so you wanted to move into banking to get a broader view of the sector?

A: Exactly. At an investment bank, your work is much broader, macro-oriented, and you might even say you have a bird’s eye view of things.

This is one reason why you see [petroleum] engineers trying to get into investment banking following their internships in industry. Another reason (drum roll) is the gold-plated exit opportunity.

Even with only a 3-month internship, people look at you differently and expect a little more from you.

When it came time to apply for investment banks, I contacted alumni, cold emailed boutiques, and reached out via LinkedIn to anyone I had something in common with. The bankers saw I already had an energy background, so the conversation was pretty easy from there.

Unlike other sectors, where you can get in without much industry knowledge, sector expertise is highly valued in oil & gas. There’s so much jargon and so much to know that you really need some type of exposure beforehand.

If you didn’t study natural resources in your major, at least take a class. I know some people get placed randomly, but you definitely want to do the “pre-season training” ahead of time if you can.

Back in 2003, there was a booklet called “Economics of the Natural World,” by the US Academic Decathlon. Reading something like this would be a quick starting point – here’s a chapter on natural resources microeconomics.

A: Much like other groups, the oil and gas sector can be viewed in different ways.

The two most common methods are by stage and company size. The latter is easier to explain, so we’ll start there:

Super Majors: These are the largest oil firms in the world. At the time of this article, the list includes BP, Chevron, ExxonMobil, Royal Dutch Shell, and Total SA (and sometimes ConocoPhillips). These companies do everything, from finding oil and gas to transporting it to refining it.

Before you get really impressed, keep in mind this list excludes state owned companies.

If you were to include those players as well, the number one contender would be Saudi Aramco, with over $1 billion per day in revenue and sometimes estimated as being worth $10 trillion USD (not a typo). Several other state-owned Russian / Chinese / Middle Eastern companies are on that list as well.

Master Limited Partnerships (MLP): These companies are similar to Real Estate Investment Trusts (REITs), in that they are tax-efficient entities that derive their income from one source: in the case of an MLP, that source is pipeline revenue earned by transporting oil and gas rather than exploring or refining it.

Companies smaller than super majors and companies which are not MLPs tend to fall into one or more of the categories below:

Integrated Companies: Not quite the largest, but still sizable firms. These companies operate across multiple stages, which is a little more complicated than dividing the world by company size (Companies include: Petrobras, China Petroleum & Chemical, and Statoil).

Upstream (Exploration & Production, or E&P): These companies explore sites to find oil and gas, and then develop and produce what they find (Companies include: Chesapeake Energy, EOG Resources, and Occidental Petroleum – some operate across multiple segments).

Midstream: Storage and transportation – these companies often do take the form of the MLPs discussed above, but tend to be smaller and more focused on only these activities.

Downstream: Refining, logistics, and marketing. By “marketing,” I mean the retail operation (at the gas station) or even in the store (other petroleum products) (Companies include: Phillips 66, Marathon Oil, and Hess Corp.).

Other: Outside of these categories, there are companies in sectors such as oilfield services (think: Halliburton) that fall under the “oil & gas” classification but which really provide infrastructure or services to energy companies.

A: On a macro level, economic conditions, and in particular, geopolitical events (national, regional, and local) make an impact on the market.

These (broad) factors influence both demand and supply.

On the demand side, you see economic growth, debt grade improvements or declines, population growth, civil unrest, and political instability as factors.

Suppose you observe massive growth in emerging markets such as China and India; this economic growth would be the biggest demand driver – when your GDP increases almost 20x in real terms, inevitably you will use more energy.

You can add seasonality as a driver as well: when things get cold, you tend to use more energy…

Downstream: Margins are determined by what the company pays for in terms of raw materials and the price of the output (set by the market).

This latter point is established by a number of factors. According to ExxonMobil, these factors include: “global and regional supply/demand balances, inventory levels, refinery operations, import/export balances, currency fluctuations, seasonal demand, weather and political climate.”

Q: And what are some of the indicators that oil & gas professionals look at?

Q: Great. So with those examples in mind, what are the more common valuation methodologies and multiples?

A: This gets complicated because it depends on the specific area that you are working in (ex: integrated, upstream, midstream, and downstream), but let me summarize it:

Upstream (E&P)

You tend to use Production and Reserves-based multiples here, such as Enterprise Value / Proved Reserves and Enterprise Value / Daily Production, because when analyzing energy companies you’re always asking, “How much am I paying for each unit of energy in the ground and/or production capacity?”

EBITDAX is a variation on the traditional EBITDA metric, and it exists because some oil & gas companies expense unsuccessful exploration and others capitalize it – so it normalizes and makes it possible to compare companies that follow different standards, similar to what EBITDAR does for companies that own vs. rent buildings (or airplanes).

You’ll see lots of Reserve and Production-related metrics such as the Reserve Life Ratio (Reserves / Production), % Oil vs. % Gas, and even Key Geographies shown along with these multiples.

The Net Asset Value (NAV) methodology is also very important and is a twist on the traditional DCF; unlike a DCF, where you assume infinite growth into the future, with a NAV model you assume that a company’s reserves get depleted far into the future and that revenue and profit go to $0, perhaps after a few years of growth initially.

So you project cash flows (production * commodity prices – expenses) until the reserves run out, discount and add them up, and then factor in the value of other business segments, undeveloped acreage, and so on.

This can get infinitely complicated – you can separate a company’s reserves by geography and by Proven vs. Probable vs. Possible (which refer to the probability of finding and producing energy), and assign different risk-weightings to each of them so that you discount cash flows by different percentages in each segment.

I’ve even seen models where people analyze each individual well separately, but that is so time-consuming that it’s not too common.

For a simple example of the output from a NAV analysis, see this page.

You can also use a DCF analysis even for upstream companies, but the NAV tends to be prevalent; public comps and precedent transactions are still used, but with the different multiples I mentioned.

One difference in the DCF here is that you may separate CapEx into Drilling & Completion (D&C) CapEx vs. Leasehold and Infrastructure CapEx, with the former being sort of like “growth CapEx” (the cost of drilling new wells) and the latter more like “maintenance CapEx” for normal companies.

And then you have actual spending in categories like acquisitions, exploration, and development, which can be considered another form of CapEx.

You have to be careful with the assumptions you’re making, because you don’t want to inadvertently imply that a company will grow cash flows at 5% indefinitely without spending anything on drilling new wells.

Midstream (MLPs)

For MLPs, the most common valuation methodologies are price to distributable cash flow multiples and the dividend discount model – just like with REITs, MLPs must issue a certain percentage of their earnings in the form of dividends, so the DDM works quite well for valuation purposes.

Yields, though not technically a valuation multiple, are also very important since many investors view MLPs as income-oriented investments (and they really are income investments if you look at the dividend yield numbers).

Distributable Cash Flow is basically cash available to Limited unit holders (as opposed to the General Partners, or GPs) after paying for CapEx, other cash expenses, and distributions to the GPs.

Credit statistics (covered in your corporate banking article) are also important – for example, investors look at both coverage ratios (EBITDA / Interest Expense) and leverage ratios (Total Debt / EBITDA) to assess which MLPs might be riskier than others.

Downstream (Refining & Marketing)

There are not too many differences in this sector because the companies are very similar to “normal” companies in other industries.

So you still see EV / EBITDA, P / E, and traditional DCF analyses.

Q: Wow. I’m amazed at how long you’ve been talking about this now.

Anything else to add?

A: Oh, I’m not done yet.

You still see methodologies like the relative contribution analysis (compare how much the buyer and seller are contributing in terms of net income, cash flows, reserves, production, etc. and base the ownership percentages and implied purchase price in a deal on that) and historical equity price comparisons (e.g. average closing price for both participants over certain time frames).

Sum of the Parts can be common with the super majors and any company that has a big presence in multiple sectors – you might use the NAV model for the E&P segment, DCF for refining/marketing, and a DDM for midstream (for example).

Q: Now you’re done, right?

A: Haha, OK, two more and then I’ll be done:

Ratio of Premium Paid to Capitalized Synergies in Precedent Transactions: This analysis can employ either average daily closing prices or the closing prices themselves on particular dates.

Return on Gross Invested Capital Comparison: Used for a single time frame (ex: ten year) and looks at the entire company or particular segment (ex: Exploration & Production or Refining & Marketing).

The standard definition for this calculation is “(Earnings – Dividends) / Total Capital.” Here, “Total Capital” is the sum of the debt and equity in a company.

Energy Banks: Super Majors and Integrated Firms?

Q: OK, enough with the technical tips, my head is spinning… great overview, though.

What are the top banks in your space?

A: The top bulge bracket banks in the space are a familiar set, and most of the big firms all have strong oil & gas teams as well.

About the Author

Luis Miguel Ochoa has worked in investment banking (industrials) and strategic planning. He graduated from Stanford and wrote many of the best articles on this site on different industry and product groups in banking.

Comments

Hi, I’m looking for some advice for how to break into oil and gas investment banking.

I am a junior at a complete non-target with a 3.9 GPA in finance. Despite coming from a non-target (probably ranked outside the top 150 or so), I have managed to secure a summer analyst gig at a top BB in their AM division. However, my passion lies with oil and gas (I have had two prior engineering internships with a F500 Upstream company, but switched majors to finance after) and when I recruit for FT after the summer is over, I would like to apply to the natural resources divisions at all the BBs and EBs via online. How can I leverage my experience with the F500 Upstream company, as well as with the BB in their AM division, to help me land an oil and gas IB position with a reputable firm?

I’d focus on networking internally and externally. Seems like you’ve got good credentials and a passion for oil and gas. What you really need to focus on now is to broaden your network and find an available role that fits you. I would focus on connecting with people via LinkedIn. Applying online may not be the most effective.

I am a student with a 3.9 GPA at a complete non-target, doing a summer analyst gig in the AM division of a BB this upcoming summer. That being said, I’d like to get into oil and gas IB and will be recruiting after the summer is over, in this upcoming FT cycle. I have also had 2 previous internships with an Upstream E&P F500 company, for what it’s worth. Both were with the same company. Coming from a non-target (probably ranked outside the top 150…), what would be your best advice to approaching FT recruiting in the natural resources division of various BBs and EBs? How can I leverage my past oil and gas experience, as well as my AM experience from this summer, to help me get into IB?

Hi all,
Along the lines of Oil & Gas investment banking…what are ways to break into O&G investment banking from industry? Especially if you don’t have a Petroleum Engineering background, but a business background? And what sorts of roles give you transferable skills besides E&P Acquisitions & Divestitures? Lastly, how would you answer those questions relative to each vertical in Oil & Gas- Downstream, Upstream, Midstream? (Particularly, the midstream sector….?)

Your best bet is to do a business role at an oil & gas or other energy company and then move in from there. Most O&G teams really want A&D reservoir / other engineers, so your chances of getting in with a pure business background are lower. If you worked in corporate finance or corporate development at an O&G company you might have a higher chance of getting in.

I don’t think it really differs by vertical, though you might have a better chance in downstream or midstream-focused groups since they are less technical.

Well, business development at most companies is essentially M&A-type work. At a larger downstream company, or a big midstream company [think KMI, EPD, PAA, Energy Transfer, Enbridge], it seems as if they don’t do as much of that sort of work…there are more commercial analyst roles than business development roles. What would be your counter to those types of instances? Is there anything relevant within those roles in the midstream area?

Along the lines of Oil & Gas investment banking…what are ways to break into O&G investment banking from industry? Especially if you don’t have a Petroleum Engineering background, but a business background? And what sorts of roles give you transferable skills besides E&P Acquisitions & Divestitures? Lastly, how would you answer those questions relative to each vertical in Oil & Gas- Downstream, Upstream, Midstream? (Particularly, the midstream sector….?)

Thanks for this article. im currently in my 5th year of college completing my ms in acct and then sitting for the CPA in Jan-May 2015. i have completed an internship at big 4 (chose houston for oil & gas) and am very interested in getting into IB in houston. Im not from there, but have received an offer for big 4 audit after i complete my MS. Currently i am learning everything i can about the industry and have family currently working in E&P there as engineers; that helps me learn. I want to leverage my big 4 experience (if need to for a year) and my own industry research to get into IB. What is the best course of action at this point since im already in my 5th year and will most likely have to start at big 4 in Houston? Can i leverage my big 4 industry specific background, along with my hobby of learning the industry and financial modeling to get into IB? thanks for any feedback.

As a petroleum geologist in Texas with ~2 years of experience in E&P my assumption was that I’d need an MBA to break into the financial sector. What I’m getting from this article however is that the best course would be for me to get into IB through networking, cold emailing, etc. Is this correct? As if I just need to make my wishes known and energy IB will welcome me with open arms?

Yes that is partially true though an MBA can be useful if you get into a top tier one and can afford it. Yes, sometimes it can be as simple as that, though it will depend on your credentials and presentation skills

Sure, thanks for answering. It’s not a path you typically hear about on the geology side so it’s pretty exciting that these opportunities exist. Are the companies listed in the article the best place to start reaching out to? If I went this path I think I’d rather get out of Texas and into Boston or NY, so any suggestions would be greatly appreciated.

Very informative! I’m currently working at a major refining company as a financial analyst. I graduated from a target school a year ago and now do mostly project finance type work (i.e. lots of DCF modeling). What’s the best way to transition into investment banking without limiting myself to the O&G industry?

Would moving into a more general IB role be difficult even with extensive networking? My current job involves a lot of collaboration with the corporate development team so I’m very frequently on the other side of many IB deals.

Hi, great article (as usual)! Just looking to expand upon indra’s comment. I’m also currently pursuing a Masters in Petroleum Engineering and I have been looking into the possibility of moving into an Investment Banks A&D group in London (I’m British) after gaining a few years of experience in the industry. It would be greatly appreciated if you could answer the following questions: what is the A&D scene like over here? I’m aware opportunuities will be far more limited than Houston (which is the gloabl hub). Secondly, I’m not entirely sure how A&D differs from O&G M&A, so any pointers would be great! Sorry for chucking a wall of text your way!

There are definitely opportunities in London, but probably fewer than in places like Canada / Australia / Houston that are hubs for natural resources. But plenty of energy groups operate from there and there are good natural resource teams. A&D is very similar to O&G M&A as far as I know.

this is article has given me a lot of insight with respect to what energy investment (oil and gas sector) actually means. I am currently pursuing my Masters in Petroleum Engineering and want to join a bank which specializes in these kind of investments. my question is do I stand a chance when I apply to these banks and will my international immigration status be an obstacle. the whole idea behind me doing a masters degree is to provide the employer with a better idea of what the total reserves are in a particular reservoir and study the latest trends in the petroleum industry. please add your thoughts.

I am glad you find our article useful! Yes you do though your visa situation can be challenging. With the above being said, engineering is a specialty occupation and it maybe easier for you http://www.workpermit.com/us/us_h1b_occupations.htm I’d also consult your career center re. firms hiring at your school and your visa situation

Hi,
Great article and highly relevant to myself, but I was hoping there’d be a little more in-depth look at how they were able to make it into O&G IB.
I’m currently in the process of getting a degree in petroleum engineering along with having 10-months of relevant internship experience (still graduating in 4 years, but had to take a semester off in the middle, so I spent it interning).
My goal is to end up working for an O&G-focused private equity firm, but I don’t know how to get there. I figure I need to get an MBA to make the switch, but I don’t know how to go about getting the finance industry experience necessary to enter PE in a more reasonable time frame than:
Work as an engineer -> b-school -> IB -> PE
In short, my question is, do you know of anyone who was able to skip some of the above steps, and if so, how?

Thanks. The way you get into O&G IB is the same as what is described everywhere else on the site, which is why we didn’t focus on it too much here – network, several rounds of interviews, and so on.

You generally do not want to do an MBA first before the others… much better to get transactional experience now and then do an MBA. It will be much tougher to get into PE afterward unless you have relevant experience first beforehand.

Hi Brian,
I am in a fix. I have an offer for the 3 year finance graduate program with Shell and BP, both in UK and will be involved in financial planning, reporting and analysis. while also earning a chartered accountant certification (CIMA). Shell might also come with opportunities in commercial upstream. on the other hand, there is an offer for graduate program in credit risk with bank of america merill lynch in London. My eventual target is to getting into Oil & Gas M&A and not sure which one I should go with (Shell/BP or BAML?). would be grateful if you could provide your thoughts on this.

The two options are actually pretty different. If you’re looking to get into O&G M&A I think working at Shell and BP would be more relevant, though you will have to find a way to move to an investment bank, through your own network or/and a graduate program at a target school. I think it can be more challenging to move from credit risk in BAML to O&G IB especially since O&G is pretty technical and interviewers prefer new hires with some sort of experience in the industry. If you’re already interested in O&G, I think the Shell and BP opportunity will allow you to learn immensely which would be very useful for you down the line, assuming you have a passion in O&G and want to progress your career in a field related to O&G, be it at a corporate or at a bank doing O&G deals/analyzing O&G companies

Hi,
I’m going to be a junior in the fall and am currently doing an investment banking internship at a top foreign firm (though not a traditional BB). I will be studying abroad in the fall – Do you have advice for how I can best position myself for recruiting? I go to a target school so I will be missing recruiting sessions in the fall. What can I do so that this doesn’t hurt me come summer recruiting?
Thanks!

International experience always looks good when applying for finance jobs so you’ve got a head start! I’d suggest you to reach out to your career center rep, as well as HR reps of all banks that recruit at your school, tell them that you’ll be missing the info sessions and ask if they could potentially connect you with their recruiting reps of their banks. Also keep in touch with them on a consistent basis so you’re in the loop. I’d also start using your alum network and connect with alums in the industry, especially banks you’re interested in working for. When recruiting season comes, tell them you’ll be applying and perhaps try to arrange a call/in person meeting (when you’re back) with them

Good Article. One question, the boutique houses you mention are predominantly Texas based, what are the primary houses which operate out of London or are most firms in the sector simply located in the US?

I would strongly advise interested candidates to obtain Deutsche Bank’s Oil & Gas Primer, a 400 page research primer published on an yearly basis. Just ask any of your banking mates with access to ThomsonOne to send you the pdf. The primer gives a high-level summary of everything you need to know. The document was actually floating around on WSO sometime ago.

Not to be a nitpicker but neither Transocean or Atwood Oceanic are E&P companies. They are drilling contractors. They are paid to drill wells by E&P companies, and therefore their balance sheets look much more like the contracting companies listed under Other.

As an undergrad, I don’t seem to have the same experience/knowledge within the industry as the two commenters above. However, I’m very interested in the natural energy industry and would like to work in Oil & Gas in Houston next year upon graduation, so I found this piece VERY insightful and helpful (even if a bit overwhelming). With that in mind, and without re-reading the networking articles and redoing the networking toolkit module, what’s the best way for a Berkeley undergrad approaching FT recruiting w/o a “brand name” summer internship to break into a bulge-bracket in Houston? I’ve already started the LinkedIn search, but this has yielded minimal results thus far…

Thanks! For getting into Houston: it will be tough to get into the biggest banks without previous IB experience. So it depends a bit on what work experience you do have right now – without knowing more about your background, I would say you might almost be better off going for boutique energy firms there and then making a lateral move after working there for a year or so.

If you have something that could be spun into sounding relevant (i.e. Big 4 experience in energy or something else energy-related), I would highlight that as much as possible and still contact alumni, even if they are not based in Houston. If they are doing something energy-related they could still help with referrals and/or getting you actual interviews there if you explain yourself well enough (again, hard to say specifically what story to tell them because I would need to know your previous work experience first).

Along the same realm, I graduated last May from Notre Dame with a B.S. in environmental sciences. I am now working for a natural gas company in Denver and saw it go through its IPO last october which fascinated me. After consulting my wall street buddies, I am ready to make the jump. Oil and Gas banking would be a dream but not sure if it is at all feasible… I have applied to get an MSF at UT and Vandy as well as the MiM programs at Duke and LSE. Should I even consider these or just start networking like crazy and drop the thought of school? I want to rebrand myself but not sure if it is worth it. I had a 3.85 and was the valedictorian of my department if thats worth anything.

What about a program at McCombs in Texas if you’re interested in O&G given their location? LSE maybe a better choice than Duke given their location in Europe, but I am not 100% sure. Yes I’d also network a lot in the meantime. If networking doesn’t help, then a Masters/MBA at a target can help.

Krisp, I have roughly 3.5 years of reservoir engineering experience and am looking at the O&G IB transition as well. I recently met with a reservoir engineer, turned oil and gas investment banker, who told me flat out – if you’re going to extend your eductation then get an MBA from a top school, or don’t do it at all. I even mentioned a MSF and he said absolutely not. Just FYI…

I hope all is well. I also agree with the post above that there are some minor oversights in this article.

I know that you do not post dates of the articles that you write on M&I because “this site is not dependent on specific industry trends or whatever’s hot at the moment.”

But I am just wondering out of curiosity, if I want to compare and read articles that you posted in previous years, how do I see the evolution and change of the articles that you have written over the years?

Is there a chronological order of when you posted the articles on this website over the years?

I feel the questions that I asked are very relevant because specific industry trends and current news events can be very important depending on the type of company and type of group that a candidate is interviewing for. There is a reason why people in Finance read the Wall Street Journal on a daily basis.

Feel free to add anything you feel was missing. This industry group article was more comprehensive than most of the previous ones, so I am somewhat baffled at this feedback.

This is now getting really off-topic, but if you really want to start from the beginning you can go here: http://www.mergersandinquisitions.com/page/155/ and move forward. You will see that at least 50% of the articles back then were poorly written or not very in-depth.

While some of your questions may be related to industry trends, probably 90% of the questions we receive are not… most questions asked here are some variant of “I have a low GPA, what do I do?” or “How can I spin my experience to make it sound more relevant?” or “How can I go from X to Y?” and the answers to those questions do not change over time. If they did, articles from 5-10 years ago would not receive even more traffic today than they did at the time of publication.

And yes, while there are important industry trends, we are not trying to be The Wall Street Journal – after all, they already exist so what value would covering the news here add?

Ok, I can’t tell if this article was written in 2000 or the author doesn’t actually work in oil & gas, but there are some pretty significant oversights. First, British Petroleum existed only until 2001, its now BP plc.(and the company is very picky on the correct usuage of their name.) Second, I don’t see how you can exclude Rosneft (the largest oil & gas company in the world) from your description about the industry. It sounds like the author has never stepped out of Texas.
The valuation info is good though, its true that its very important to understand this in the industry.
I would have expected a little more quality from M&I, articles older than 2012 year were much better.

Thanks for your feedback. The article, in fact, was written in 2013 and I think you might be paying too much attention to small details… yes, technically it is BP but everyone knows British Petroleum as well (I did go back in and change that, though).

Rosneft: As mentioned in the article, Rosneft is 75% owned by the Russian government and as a result it was not listed because it is mostly state-owned. Even Wikipedia agrees with what was listed above: http://en.wikipedia.org/wiki/Supermajor

Articles before 2012: Well, you can always go back and read those. There is only so much I (Brian) can write about personally, and it was necessary to bring on new writers to cover topics that I do not know much about. And, incidentally, plenty of my own articles from back then were not that good…